‘This opens the door to a currency war’ — City reacts to escalating US-China row

Move by US to formally accuse Beijing of currency manipulation has investors wondering whether it might be time to batten down the hatches

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By

Mark Cobley

August 6, 2019 12:17 pm GMT

Fund managers and City investors fear the US Treasury’s move to label China a currency manipulator could be the first step in a currency war, despite efforts by China’s central bank to calm the situation.

Stock markets dropped sharply in the US and Asia on August 5 and 6, after the US government formally accused the Chinese government of currency manipulation.

Global markets were thrown into panic after the announcement from the US Treasury, which followed the decline of the yuan to below seven to the dollar. But the People’s Bank of China said the depreciation was caused by foreign exchange traders taking a negative view of the Chinese economy “due to the effects of unilateralist and trade-protectionist measures”.

Nonetheless, fund managers were alarmed at the prospects of a dramatic worsening of US-China relations. Here, Financial News rounds up the best of the commentary.

George Efstathopoulos, multi-asset portfolio manager, Fidelity International“President Trump has been very vocal in lamenting US dollar strength and its threat to his economic agenda. He’s failed to rule out currency intervention when asked directly and has a good track record of following through with his warnings. The chance of getting his way is surely higher now the Treasury have labelled China a currency manipulator, and because the same department also has responsibility for setting US dollar policy.

“This latest move at least levels the playing field somewhat and opens the door to a currency war, which would certainly up the ante in the trade war. However, it could prove counterproductive considering that, in recent times, China has intervened to stop its currency from depreciating further rather than manipulating [it] weaker as accused by the US.”

Nick Wall, co-manager of the Merian Strategic Absolute Return Bond Fund, Merian Global Investors“This has a lot of ramifications. Most obviously, it makes a trade deal unlikely anytime soon, especially after it was reported that Chinese companies have been told to halt imports of US agricultural products. Secondly, it means more dollar strength hurting the rest of the world that has borrowed a lot in the reserve currency — the risks of a further dollar squeeze and more foreign exchange volatility are now quite high.

“Thirdly, it’s deflationary — China’s currency strength meant it was importing some of the rest of the world’s deflation. This puts even more onus on the US Federal Reserve to ease policy to get the dollar down. The curve, trade and the dollar should be the key metrics the Fed looks at, not lagging domestic data. There are now 60 basis points of Fed rate cuts priced before year-end; I don’t think this will be enough.”

Esty Dwek, head of global market strategy, Natixis Investment Managers“It is important to highlight that Chinese policymakers allowed a depreciation of the yuan, they didn’t instigate a devaluation of their currency. That is, they allowed the renminbi to cross the key psychological level of 7, without intervening to strengthen it. Nonetheless, the US Treasury named China a currency manipulator as a result.

“However, China placed its latest fixing below 7, in an attempt to de-escalate the situation. We expect Chinese policymakers to keep the currency relatively stable around current levels, and do not expect a massive active devaluation.

“Labelling China a currency manipulator means there is a risk the US will seek sanctions, or increase its tariffs in response, but this is unlikely to be immediate. If the currency stabilises around or below 7, the situation could ease... Our base case remains some kind of truce or deal later this year or more likely in early 2020, to ensure a decent economic background into the US elections.”

Paul O’Connor, head of the UK multi-asset team, Janus Henderson Investors“While the immediate market focus is on the risk of a prolonged dispute between China and the US, there is also some concern that trade conflict is already becoming a broader global theme. Investors are already trying to evaluate the impact of the current trade dispute between Japan and Korea and are on standby for any resumption of US global actions on autos or US-eurozone trade hostilities. Beyond this, the drop in the yuan has already caught Donald Trump’s eye and has investors on edge in case currency wars are about to become a new area of international conflict.

“With most financial assets having already delivered strong returns this year and visibility on the global macro outlook being unusually low, we see a strong incentive to lock in some profits in risk assets and to retreat until risk/return prospects improve or the global outlook becomes more predictable.”

Ludovic Colin, head of global flexible investment, Vontobel Asset Management“Basically trade tensions will not go away, and are being used by the US administration as a policy tool, as well as a political campaign strategy... We had to review a few of our market scenarios: The chances of a global recession in the next 18 months is now higher, and we need to re-assess different assets’ fair value.

“It is always hard to gauge strategies of the opposing parties in these negotiations, but it looks like this is going to escalate rather than peter out. The chances of a positive outcome this year are lower than previously thought which has caught investors off guard. They will be reluctant to react to any positive news in the near term.”

To contact the author of this story with feedback or news, email Mark Cobley